Jobs key to recovery, and the Fed

WASHINGTON (CBS.MW) -- Financial markets have been blissfully ignoring weak economic news in the past two weeks. That could end in the coming week with two blockbuster reports that will be very hard to shrug off.

With an election and a Federal Open Market Committee meeting coming just a few days afterward, Friday's releases of the October jobs and manufacturing sentiment reports could influence near-term monetary policy and the long-term makeup of Congress.

Markets will have to fight through another dismal reading on consumer sentiment early in the week, then wait until Thursday and Friday for the really big news. See our complete Economic Calendar and Forecast. The good news will come Thursday, when the Commerce Department will give its first estimate of third-quarter growth.

A turnaround in capital investment and stronger retail sales in June, especially for autos, likely gave the economy enough momentum for a 3.7 percent annualized growth rate in the quarter, economists say.

The issue for the Fed and for markets is not third-quarter strength, however, but fourth-quarter weakness. Consumer and business spending appear to have slowed in August and September.

The Fed

Although the FOMC is poised to cut rates at any time, the news on Friday probably won't be dire enough to get the Fed to move.

"I'd bet against it," said Wayne Ayers, chief economist at Fleet Boston, of a possible rate cut at the Nov. 6 meeting. The recovery is tentative and fragile, but Fed officials believe "it's not an interest rate problem," he said.

"There's not much the Fed can do to further encourage consumer spending or encourage capital spending," Ayers said. "It'll take time."

In addition, Ayers said, "The Fed is fearful of sending a panic signal."

Most other economists on Wall Street agree that a rate cut is a longshot at this point, even if the unemployment rate soared in October or the Institute for Supply Management index falls further below the key 50 percent level.

"Although we expect both measures to be on the soft side, neither is likely to be ugly enough to prompt a Fed easing," said Joe Abate, economist at Lehman Brothers.

Lehman's economics team had been forecasting an aggressive Fed easing campaign this fall, but backed off earlier this past week when it became clear from a raft of speeches by Fed bank presidents that the Fed is being patient, not pre-emptive.

The Wall Street economists we surveyed say the odds of a November rate cut are just 27 percent.

A few holdouts remain. "In our view, the data to be released between now and Nov. 1 will likely tip the scales one way or the other," said John Youngdahl, economist at Goldman Sachs. Continued weak data "might very well be sufficient to finally push a majority of the FOMC into favoring a 50-basis-point rate cut early next month," he said.

Jobs

Only about 12,000 nonfarm payroll jobs were added in October after a loss of 43,000 jobs in September, economists predict. They think the unemployment rate likely jumped to 5.8 percent from 5.6 percent.

The September jobs report was an oddity. The establishment survey of about 300,000 businesses was mainly on the weak side, while the household survey of 60,000 homes was strong. The jobless rate, which comes from the household survey, fell two-tenths of a percentage point to 5.6 percent, against the expectations of most economists.

Lehman's Abate thinks the decline in the jobless rate in August and September was "statistical noise" that will be washed out in the October data.

Ayers of Fleet Boston isn't so sure. He says the household survey, for all its faults, is probably more informative at turning points in the economy, because it picks up changes in self-employment and entrepreneurial activity that the establishment survey can only guess at.

For economists, the most hopeful sign in the September report was the 0.4 percent increase in total hours worked in the economy and the increase in the average work week to 34.3 hours, matching the highest level since the recession began.

Businesses always push their existing workers harder before they are willing to hire new, untested and, on the margin, more expensive workers. The hours-worked data are the best leading indicators of the labor market we have.

For workers and voters, the jobless rate is the most important economic statistic. If the jobless rate were to rise significantly in October, it could be a factor in the Nov. 5 elections, with control of both houses of Congress up for grabs.

According to polls, Democrats for the most part have been unable to capitalize on consumers' fears about the economy or their dissatisfaction with the Bush administration's economic policies.

A sharp increase could motivate voters to seek a change or send a message. Alternatively, another drop in the jobless rate could put economic worries to rest and give the Republicans a boost.

For the Fed, the best and most timely future-looking gauge of the economy is the monthly ISM index on manufacturing sentiment. The ISM index sank below the 50 percent level in September for the first time since January and could fall lower in October. At 50 percent, half of the firms are reporting improving economic conditions.

The consensus estimate for the ISM is 48.8 percent, our survey shows. The ISM has dropped two of the past three months after hitting 56.2 percent in June.

Most other indicators of the manufacturing sector have weakened since midsummer. Industrial production has fallen two months in a row. Durable goods orders are down three of the past four months, with core capital goods orders falling to the lowest level in a year.

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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